Acquiring minds

Buying companies can be smartest route to growth

CEO Srini Pillarisetty did the math when he decided to take IT company Vigilant Technologies LLC into staffing, buying Elite Software Quality Services Inc. instead of growing his existing company.

When Srini Pillarisetty decided to broaden his IT company's reach into staffing, he had two options: Spend money buying an IT staffing company, or spend even more building one from the ground up.

He went with the first option.

"The cost of the acquisition was less expensive than if we were to do a five-year plan in terms of hiring and acquiring customers," said Pillarisetty, president of Vigilant Technologies LLC in Troy. "In this case, it was much more inexpensive to grow through acquisitions than to grow organically."

Vigilant acquired Elite Software Quality Services Inc. in Troy in 2009. The acquisition increased Vigilant's client base from 12 to 20 and increased revenue by $1.6 million. It has since gained seven more clients because of the staffing services offered by Elite Software.

"We have a new business unit altogether," Pillarisetty said. "We're now a one-stop shop for our clients."

Vigilant sells professional, managed and staffing IT services to small and midsize businesses. The company had $3.5 million in revenue in 2010 and projects $7 million this year and $12 million for 2012.

He said the acquisition pushes up revenue each year because the added offerings make it easier for Vigilant to compete and grow faster.

Pillarisetty met the owner of Elite Software in 2007 and started talking about an acquisition at the end of 2008. He said he did not hesitate to make the deal because of the potential to expand Vigilant's service offerings and increase clients.

"Vigilant was focused on Oracle managed and professional services, and Elite's primary focus was Oracle staffing," he said. "With the acquisition, we could offer our customers a complete end-to-end solution within the Oracle space. We kind of lined up all the business units."

Pillarisetty said he financed the acquisition with cash reserves and stock options but declined to say how much it cost to buy Elite Software.

"The IT economy was coming back and the economy was coming back to normal spending," he said. "We just felt it was the right time to grow."

Before the acquisition, Pillarisetty said he worked for six months on the due diligence to understand the people, service offerings and clients of Elite Software.

"We got an idea of how difficult the acquisition would be and if it would work," he said. "It was all about identifying potential risks and putting in a plan to process those risks."

He said the biggest challenge in merging the two companies was protecting the employee base and the customers of Elite Software. He made the move in multiple phases: transitioning employees from Elite to Vigilant, followed by suppliers and finally customers.

"Any time there is a change, people are a little concerned because they don't know what's going to change and how it's going to impact their business or jobs," Pillarisetty said. "You need to communicate to them that it's just the ownership that's changed."

He said he could have definitely made some improvements in terms of structuring the acquisition, but now he knows how to negotiate a better deal in a shorter time period.

"The next acquisition is going to be a replication of what we did," he said, "but at a much faster pace with a lot more experience under our belt."

The acquisition also led to picking up Elite Software's subsidiary CTA Software Pvt. Ltd. last year. The Hyderabad, India-based company offers quality assurance testing services and allowed Vigilant to save money by going offshore.

"There's a change in the IT landscape," he said. "There's a huge change in how the IT companies are looking for solutions, and we are positioning ourselves to be the leaders."

The company now has 85 employees globally and serves 30 North American clients, including Barrick Gold Corp., American Axle

& Manufacturing Inc., MSX International Inc. and W.B. Doner & Co.

Pillarisetty is not looking for other acquisitions but would do another one if it made sense.

He said other business owners considering an acquisition should ask themselves a few fundamental questions: Does it add value to existing customers? Will it better serve customers? Does it make the business stronger to compete in today's business climate? And what is the right valuation?

For second-stage companies, strategic acquisitions can be part of the growth plan that also fills in gaps in a business' set of offerings.

Another IT company, Troy-based Trubiquity Inc., has more than doubled its customer base from 3,000 to 6,500 with six acquisitions since 2005, including two in California this year.

Trubiquity acquired NexPrise Inc. in Carlsbad, Calif., in April and ECbridges Inc. in Walnut Creek, Calif., in August. The companies each came with about 50 customers, and NexPrise brought technology that Trubiquity had been seeking for some time and also helped the company expand into aerospace and retail.

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Koons

"It boils down to how quickly you want to build scale," said CEO and President Steve Koons. "If it's important to you, an acquisition is certainly a viable route. You're not going to get the same speed in growing your business from the ground up than you would with an acquisition." He said he's still growing Trubiquity organically; but to turbocharge growth, one of the fastest ways to get there is the acquisition route.

"Our acquisitions have always been centered around bringing in new technology, acquiring personnel with the right sort of skill sets and customers with either a geographic or industry presence," he said.

Koons said that with the two acquisitions, the company is now approaching revenue of $20 million.

He said the first four acquisitions were largely funded by Kinderhook Industries LLC, a private equity investment firm in New York City that owns Trubiquity, while the two acquisitions this year were financed with a combination of cash from Trubiquity, bank loans and seller notes.

Two acquisitions went to grabbing one company in Germany and another in the United Kingdom. Trubiquity's customers include global automakers and suppliers that expect capacity on a global scale, Koons said.

But that meant combining actual cultures, not just corporate ones.

"You have to overcome language and culture hurdles as you build a corporate culture," he said. "A team-oriented atmosphere, especially when your business is distributed, is very important to build that common understanding. If you do that well, you can be very successful."

True North Equity Partners LLC is in the business of acquiring and combining businesses. The Plymouth-based private equity firm acquired New Berlin, Wis.-based KS Energy Services LLC in June 2010, and Conyers, Ga.-based Southeast Connections LLC in July this year.

KS Energy Services, which provides construction and technical services to the natural gas, electric and telecommunication industries, increased True North Equity's revenue by $50 million, while Southeast Connections, whichmaintains, repairs and installs natural gas equipment, brought in $40 million. True North Equity combined the two businesses under a newly created holding company, Plymouth-based PowerTeam Services LLC, expected to reach revenue of more than $120 million this year.

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Wigginton

"If you've saturated your market, whether geographically or product-wise, it's easier to go out and get something to further things," Managing Partner Jeff Wigginton said. "It's critical that the business understands the shortcomings of (the) company and uses the acquisition to strengthen itself."

Wigginton also said the biggest issue with an acquisition is combining the cultures.

"You've got two separate and distinct companies, and you're asking everybody to adapt," he said. "You need to ask yourself, how do these people work on a day-to-day basis, and is the fit going to work?"

Wigginton said a company should do what it can to make an acquisition a positive experience -- people at the target company are nervous to begin with because they're facing the unknown. Once an acquisition is made, he said, a company should have a meeting with the management team of the acquired company to address concerns and answer questions.

"There has to be full disclosure with the employees of the company," he said. "Don't send an email, don't leave a voice message. Get on a plane and go there. What'll hurt you a lot of the time if you don't do that is rumors."

Wigginton also said a business should understand how customers may react to a new owner.

"There's a major risk involved in the due diligence process," he said. "You really have to understand where the customer relationship lies and put together a transition plan accordingly to deal with that risk."

Wigginton said he is "absolutely" looking for another acquisition and is in various stages of talks with 15 companies. He would like to complete two or three deals in 2012.

"You have to know exactly what you're looking for," he said. "Companies have a limited amount of resources and capital to spend on acquisitions, and you want every dollar to count. Make sure it's the perfect fit."